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Inflation and the steeplechase between economic activity variables: evidence for G7 countries

Baxa Jaromír, Miroslav Plašil and Bořek Vašíček ()
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Baxa Jaromír: Charles University, Institute of Economic Studies, Prague, Czechia

The B.E. Journal of Macroeconomics, 2017, vol. 17, issue 1, 42

Abstract: A sharp increase in unemployment accompanied by a relatively muted response of inflation during the Great Recession and a consecutive inflationless recovery cast further doubts on the very existence of the Phillips curve as a systemic relation between real activity and inflation. With the aid of dynamic model averaging, this paper aims to highlight that this relation resurfaces if (i) inflationary pressures are captured by a richer set of real activity measures, and (ii) one accounts for the existence of a non-linear response of inflation to the driving variable. Based on data for the US and other G7 countries, our results show that the relation between economic activity and inflation is quite sturdy when one allows for more complex assessment of the former. We find that measures of economic activity describe inflation developments to a varying degree across time and space. This can blur the picture of inflation–real economy comovements in models where only a single variable of economic activity is considered. The output gap is often outperformed by unemployment-related variables. Our results also confirm a weakening of the inflation–activity relationship (i.e. a flattening of the Phillips curve) in the last decade that is robust both across activity measures and across countries.

Keywords: dynamic model averaging; inflation dynamics; Phillips curve; real economic activity (search for similar items in EconPapers)
Date: 2017
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Working Paper: Inflation and the Steeplechase Between Economic Activity Variables (2013) Downloads
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